Cyclically Adjusted Price to Earnings Ratio
The Cyclically Adjusted Price-to-Earnings Ratio (CAPE), also known as the Shiller P/E, is a stock valuation metric most commonly applied to the U.S. S&P 500 equity market. Unlike the traditional P/E ratio, CAPE uses a 10-year moving average of inflation-adjusted earnings to smooth out the effects of economic cycles, providing a more stable gauge of fundamental value. It is designed to help identify whether a stock or market is undervalued or overvalued over the long term. Widely used by financial analysts and economists, the CAPE ratio isolates the impact of short-term volatility and business cycle fluctuations. Developed by Nobel Prize–winning economist Robert Shiller, it gained prominence during the Dotcom Bubble as a tool for assessing long-term market performance.
ABOUT THE CAPE RATIO
The Cyclically Adjusted Price-to-Earnings (CAPE) ratio evaluates long-term company profitability by smoothing out economic cycles.
Uses a 10-year moving average of inflation-adjusted earnings to account for expansions and recessions.
Helps determine whether a stock or market is undervalued, fairly valued, or overvalued.
Developed by Nobel Prize-winning economist Robert Shiller and widely used by financial analysts and economists.
ROLE IN THE MARKET
Historically identifies potential market bubbles and overvaluation periods.
Long-term historical average for the S&P 500 is between 15-16; peaks have exceeded 30.
Key peaks occurred in 1929 (pre-Great Depression), late 1990s (Dotcom Bubble), and 2007 (Global Financial Crisis).
Demonstrates relevance for anticipating long-term market risks and investment decisions.
FORMULA
CAPE Ratio = Stock Price ÷ Average Earnings over 10 Years (Adjusted for Inflation)